Back in April 2017, the IR35 legislation was updated for contractors working within the public sector.

This update lead to a number of public sector bodies announcing a blanket decision about the status of their contracts. In recent months we’ve seen some of these bodies change their stance on the legislation, but what does that mean for contractors? Below we explore the last few months in IR35.

What is IR35?

The IR35 legislation was first introduced in 1999 – and became law in 2000 - to combat tax avoidance for those who are self-employed. The legislation is aimed at reducing ‘disguised employment’ whereby someone working through their limited company would be doing the same job as a full-time employee, therefore benefitting from the associated tax efficiencies.

The legislation was brought in after a number of stories were released into the media regarding those in the public sector who would resign from their roles as employees then shortly after re-join to do the same job but as a limited company director.

You can find out more about IR35 on our sister company ClearSky’s guide.

What IR35 changes were made in April 2017?

As from the 6th April 2017, IR35 rules were changed for contractors working in the public sector. Previously, it was up to the contractors themselves to decide whether or not their contract would be ‘inside’ or ‘outside’ IR35. However, since the update on the 6th April, the decision of whether a contract fits inside or outside of the legislation now sits with the end client for those working within the public sector only. This lead to a number of public sector bodies announcing that they would make a blanket decision to declare all of their contracts as inside IR35 and even some private sector companies taking this stance.

What’s the difference in being inside or outside IR35?

For limited company directors, working on a contract which is deemed outside IR35 means that they can benefit from the associated tax benefits. If a contract is deemed inside IR35 then any income from that particular contract would need to be treated the same as an employee’s income – with PAYE tax and National Insurance contributions being made.

The decision from some public sector bodies following the legislation updates on the 6th April 2017 would have meant that limited company directors working for those companies would have experienced a decrease in their take home pay unless their daily rates were increased.

Public Sector Bodies U-Turning on their IR35 Stance

The most notable company in the public sector to have changed their stance when it comes to the IR35 legislation is the NHS. After it being announced shortly before the IR35 changes came in that the NHS would deem its entire PSC workforce inside IR35, the body faced backlash with a number of contractors threatening to quit. The company quickly u-turned on their blanket assessment of contracts inside IR35, admitting that defining all contracts as inside IR35 would be inaccurate and that they now plan to use facts to make IR35 decisions on a case-by-case basis.

Remember IR35 rules work on a contract by contract basis so it may be that even if your last contract was deemed to be inside of IR35 it won’t necessarily mean your next one will be. It’s therefore worth getting some independent advice on each contract, something our sister company ClearSky Contractor Accounting can help with plus remember that private sector contracts do not fall under these new rules.

How can Parasol help?

U-turns like this from public sector organisations make it clear that working as a limited company within the public sector isn’t dead. However, if you usually contract within the public sector but a recent contract has been defined as being inside IR35, using an umbrella company for that contract may be the most efficient way for you to work and as IR35 doesn’t apply to employees of umbrella companies you may be better off. If you have any questions or would like some advice, our Best Advice team will be happy to help. You can get in touch with us on our contact us page or give us a call on 0800 464 0524.